Crucial weekend for world markets

The immediate trigger for the markets could be the Fed meeting on Tuesday.

In the 19th century, it was popularly believed that whenever France would sneeze, the rest of Europe would catch a cold.

In the new world order, the US is giving chills to the rest of the world. As weak economic data kept coming out of the US and Europe’s sovereign debt crisis looked set to worsen, Dow and the S&P tumbled more than 4 per cent on Thursday and the Nasdaq lost five per cent on fears that the US could be staring at another recession. The fall in the US markets this week is the worst since December 2008. The US indices are down about 10 per cent in the past 10 days. The panic situation gripped Indian equities too, which saw the benchmark Sensex fall by 387 points to 17,305.87 points on Friday.

The weekend will be crucial as clarity will emerge on what happens to Italy. Italy's debt as a proportion of its GDP is second only to Greece. To make matters worse, the economy has been growing at a snail’s pace for more than a decade. If the situation does not deteriorate over the weekend, a crisis could be averted. The US is in a no-win situation, as it has few choices. If the Federal Reserve hints at a stimulus package on Tuesday, then it will have a short-term positive impact on markets, but structurally it will worsen the economy (not to say push up prices of commodities and crude oil). And if there’s no stimulus and there is a cutback in spending (as has been agreed), growth will slow down. This is what is actually spooking the markets much more. In Q2 of 2011, Europe’s developed economies have grown at less than half of the rate at which they grew in Q1.

How does all this impact India? For starters, the fear of a slowdown in the US and Europe led to investors dumping stocks of IT companies. The BSE IT index closed four per cent lower at 5,459 points.

The big fear, apart from a major slowdown in the world economy is of slower exports. However, since Indian exports account for merely 18-20 per cent of GDP, the impact would not be muted, says Dipen Shah, senior VP (private client group research) Kotak Securities. As fears of a slowdown in the US and Europe start looking real, crude prices have started coming off. If this continues, India would do well in managing its fiscal deficit and inflation.

Jigar Shah, head of research at Kim Eng Securities, believes that buoyancy would return to the Indian economy and stocks when the central bank signals an end to rate tightening by Q3 or Q4 this financial year.

Needless to say, the markets could remain weak in the near-term and weak global sentiment would have an impact on fund flows. However, the developments of the last 10 days could be partially positive for India on the inflation side. If relevant actions on growth are taken up, it can address those concerns also for India, making India a preferred destination, explains Shah.

The immediate trigger for the markets could be the US Federal Reserve’s meeting on Tuesday.